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The principal–agent problem typically arises where the two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agent is always acting in the principal's best interest, particularly when activities that are useful to the principal are costly to ...
In microeconomics and contract theory, the first-order approach is a simplifying assumption used to solve models with a principal-agent problem. [1] It suggests that, instead of following the usual assumption that the agent will take an action that is utility-maximizing, the modeller use a weaker constraint, and looks only for actions which satisfy the first-order conditions of the agent's ...
The multiple principal problem, also known as the common agency problem, the multiple accountabilities problem, or the problem of serving two masters, is an extension of the principal-agent problem that explains problems that can occur when one person or entity acts on behalf of multiple other persons or entities. [1]
However, a principal–agent problem can occur when there is a conflict of interest between the agent and principal. If the agent has more information about his or her actions or intentions than the principal then the agent may have an incentive to act too riskily (from the viewpoint of the principal) if the interests of the agent and the ...
An agency cost is an economic concept that refers to the costs associated with the relationship between a "principal" (an organization, person or group of persons), and an "agent". The agent is given powers to make decisions on behalf of the principal. However, the two parties may have different incentives and the agent generally has more ...
In modern contract theory, "adverse selection" characterizes principal-agent models in which an agent has private information before a contract is written. [ 23 ] [ 24 ] For example, a worker may know his effort costs (or a buyer may know his willingness-to-pay) before an employer (or a seller) makes a contract offer.
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This book led to dynamic programming being employed to solve a wide range of theoretical problems in economics, including optimal economic growth, resource extraction, principal–agent problems, public finance, business investment, asset pricing, factor supply, and industrial organization.